What is Deferred Revenue?
Deferred Revenue means the amount received by a company in advance for the services which have not been rendered and goods which have not been delivered. Deferred Revenue is not a Revenue. Deferred Revenue is treated as a company’s balance sheet Liability and not an asset. Deferred Revenue is also known as “Unearned Revenue” or “Prepaid Revenue”.
In the accrual method of accounting, income that is earned in advance is a liability because the company received money has not earned. So, it is an obligation to delivers goods and services in the future. Once the money is earned it will be moved from Deferred Revenue (Balance Sheet) to Revenue (Income- Profit & Loss Account).
Deferred Revenue is basically treated by software and service providing companies. The work process follows in the way. For example- A software company provide yearly subscription and receive payment in advance for the whole year. So, the unearned income is treated as Deferred Revenue and coded under Balance sheet as a liability. Every month the calculated revenue is transferred from Deferred Revenue to Revenue that means from the balance sheet liability it becomes the revenue a part of profit & loss account. As the company earns revenue, it reduces the liability and increases the income. Also, it depended on the company’s contract that the selling company may not be allowed to recognize revenue till the product is delivers or service is rendered completely. In this situation, the company can skew the reported performance to show early losses and follow by profits in later periods.
Deferred Revenue Accounting-
Cash/ Account Receivable A/c Dr
To Deferred Revenue A/c
Deferred Revenue A/c
To Revenue A/c
The concept of Deferred Revenue plays an important role in accrual basis of accounting in the Balance sheet and P&L account of the company. It protects against treating unearned income as an asset and from overvaluing the company’s net worth. Although It is important for the company as they finance operation without limiting other company’s asset.
The deferred revenue is used in accrual accounting when the revenue is unable to be recognized immediately upon the receipt instead recognized that revenue over time. For example, there is a software known as SaaS Optics that keep the records and track the revenue. At the same time differentiate the revenue as long term or short term deferred revenue.
Deferred Revenue Misinterpret
Sometimes, businessmen offset the deferred revenue with accounts receivables. Under GAAP, Deferred Revenue should not be treated as double entry accounts along with the account Receivables to reveal the contract value. As each month passes and services are actually performed the business will debit the deferred revenue and credit the revenue.
In the nutshell, Deferred Revenue is not a revenue. That is the amount received in advance which is treated a liability till the services and product are completely offered. It is most important for financial operations without affecting the company’s asset. Deferred revenue is for the services or product.